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Opinion: How Not To Rescue Ukraine From Collapse

WASHINGTON, DC -- Ukraine has a new democratically elected government that faces the immense task of preventing an economic free fall.

Steve Forbes, Chairman & Editor-In Chief of Forbes Media, is the author of this article.

Vladimir Putin is counting on economic chaos to reestablish Moscow’s control over Ukraine.

His machinations in the eastern part of the country have hit snags following his seizure of Crimea.

But this former KGB agent knows how to bide his time while letting events create new opportunities.

Unfortunately, bad economic advice from the IMF may do just that for the master of the Kremlin.

Two months ago Ukraine’s beleaguered interim government signed a desperate deal with the IMF to get badly needed monetary help.

Kiev received $3 billion right away, with access to as much as $14 billion more over the next two years.

Alas, the deal’s terms were typical IMF antigrowth nostrums and encapsulate all the bad economic dogma that’s plaguing the world today.

As discussed in my new book, coauthored with Elizabeth Ames, Money: How the Destruction of the Dollar Threatens the Global Economy–and What We Can Do About It, the most critical factor in enabling an economy to achieve vigorous, sustainable growth is a sound currency.

Even if a country gets its policies right regarding taxes, spending, the rule of law and regulations, it will flounder if its money is soft.

Money measures value the way a clock measures time.

When Britain 300 years ago fixed its pound to gold, the Sceptred Isle vaulted from a second-tier power to the mightiest nation the world had ever seen.

In the early 1790s the U.S. put itself on the road to surpassing Britain when our first Treasury Secretary, Alexander Hamilton–with George Washington’s vigorous approval–linked the dollar to gold.

This link, coupled with fiscal reforms, turned the U.S. from a junk bond nation into one with a triple-A credit rating.

The U.S. became an irresistible magnet for foreign capital and the catalyst for ever-growing capital creation here at home.

Yet the IMF ignores the link between gold and a sound currency.

Here’s what the agency’s head declared in announcing the Ukraine deal: “The program focuses on maintaining a flexible exchange rate to restore competitiveness,” which is Keynesian-speak for further devaluation of the already weak hryvnia.

Argentina has been following such an approach for a century and has gone from being one of the world’s richest economies to one of increasing poverty and economic stagnation.

In a painful display of its economic illiteracy the IMF also said that Ukraine should push for “domestic price stability,” as if Ukraine were in a separate universe from the rest of the world.

In other words, Kiev could trash the value of the hryvnia to make its exports “more competitive” while maintaining a sound hryvnia at home.

Every country that’s tried that impossible trick has ended up with a punk economy of subpar growth.

Needless to say, the IMF pushed for “revenue enhancements,” a euphemism for tax increases.

Just what a struggling economy doesn’t need.

We can only hope that Ukraine’s new president, Petro Poroshenko, can see through this destructive nonsense and institute a currency board that will fix the hryvnia to the dollar or the euro, which would permanently stop its slide.

He should also enact lower taxes à la Hong Kong, Singapore and Switzerland.

Putin is counting on the IMF’s economic malpractice to help him achieve his expansionist goals in Ukraine.

Source: Forbes

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Comments

Very smart advice to new Ukrainian President. I wish Mr. Poroshenko takes this advice seriously and give the commend to his crew to study speediest and safest way to implement this strategy, which will revive the country. I support better Ukraine.